I write on fiscal and economic policy issues at all levels of government. Areas of particular interest for me include tax policy, entitlements and public employee compensation. In addition to Forbes, I contribute periodically to National Review Online, City Journal and the New York Daily News. Previously, I was a commercial real estate finance analyst at Wells Fargo. I hold a Bachelor's Degree from Harvard College.

Romney Plan is a Huge Tax Cut

I’ll have more comments on this to come, particularly as the campaign releases more detail, but the most important thing to know about Romney’s proposal is that it’s a huge net tax cut. Before base broadening, the plan could be expected to cut federal revenues by about $5 trillion over a 10-year period, compared to a policy of extending 2012 tax policy (except the payroll tax holiday) into the future.

On a static basis (that is, before estimating economic feedback effects from cutting taxes) Romney’s corporate tax cuts would cost about $1 trillion, a 20 percent across-the-board cut in personal income tax rates would run about $3 trillion, and then sundry other proposals (most notably, abolishing the AMT and giving capital gains tax relief to lower- and middle-income households) would cost about another $1 trillion.

Those numbers are not exact, and the campaign indicated on a press call today that it has a score which it plans to release in the future. But while the campaign’s number will surely deviate somewhat from $5 trillion, it will in any case be large.

The Romney campaign says this plan will be fully offset so as not to grow the deficit. The campaign’s fact sheet identifies three categories of deficit offsets (emphasis mine):

Government cannot continue to increase irresponsibly the size of annual deficits. Stronger economic growth and reductions in spending will help to ensure that these tax cuts do not expand deficits. In addition, higher-income Americans in particular will see limits placed on deductions, exemptions, and credits that are currently available.

Getting to $5 trillion from these three categories is going to be a challenge. Let’s take a look at them individually.

Base broadening (limits on deductions, exemptions and credits). In order to put a big dent in the revenue losses due to this proposal, Romney would need a very aggressive broadening of the tax base. For comparison, President Obama’s fairly aggressive plan to limit itemized deductions for people with high incomes would raise a bit less than $600 billion over 10 years. Will Romney get to a bigger number by going after popular middle-class tax benefits like the tax exclusion for health benefits and the mortgage interest deduction? I would certainly support that, but Romney’s focus on high earners makes me doubt that he’ll beat Obama’s figure by much.

Dynamic effects (including economic growth). I think it is likely that a significant minority of the $1 trillion cost to cut corporate taxes would be covered by dynamic effects–that is, the tax cuts would lead to greater taxable corporate income, because of higher investment and because of reduced efforts to shift taxation to other jurisdictions. Dynamic effects would not cover much of the $4 trillion revenue loss from the other tax cuts, which are not targeted at taxpayers who can be expected to be especially responsive to incentives.

Spending cuts. Base broadening and dynamic effects aren’t likely to come anywhere close to offsetting a $5 trillion static revenue loss. As such, I expect that Romney would have to lean heavily on deep cuts in federal spending–a challenge, especially since Romney has made commitments to expand military spending. It is important to remember that this tax cut will require spending cuts over and above those that are already necessary to close the long-term budget gap that will exist even if tax policy remains the same as it is today.

This tax plan does something that Romney had, to date, avoided: it promises Republican primary voters a big tax cut at a time when federal revenues are unusually low and projected budget deficits are very large. While the political impulse here is clear, I think Romney had been wise, from a policy perspective, to avoid making such a promise. This plan, therefore, is a negative development.

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